Reg 21 of the Income Tax (PAYE) Regulations 2003 says that the employer must deduct tax by reference to the employee's code, even if the code is the subject of an objection or appeal. I've been asked what the penalty is if an employer uses the code the employee thinks should be used, to avoid hardship. (I'm assuming the employer knows enough about the employee to agree.) As far as I can see, there's no specific penalty relating to codes. The employer would be liable to penalties on the difference between the tax deducted and the tax that would have been deducted had the HMRC-issued code been used ie the usual "late paid" PAYE penalties. What am I missing?